Stocks suffer their worst loss since February

Home-loan turbulence causes new concerns over tightening of credit

Vikas Bajaj, New York Times

Published 4:00 am, Thursday, August 9, 2007

Photo: YURI GRIPAS

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U.S. President George W. Bush speaks during a news conference in the White House press room in Washington before departing for the start of his summer vacation August 9, 2007. REUTERS/Yuri Gripas (UNITED STATES) 0 less

U.S. President George W. Bush speaks during a news conference in the White House press room in Washington before departing for the start of his summer vacation August 9, 2007. REUTERS/Yuri Gripas (UNITED ... more

Photo: YURI GRIPAS

Stocks suffer their worst loss since February

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Stocks sustained their biggest one-day decline since February on Thursday after the turmoil in the home-loan market caused renewed concerns about tightening credit worldwide.

The decline began at the opening bell after a French bank, BNP Paribas, suspended operations of three of its funds after the turbulence in the American market for home loans. The European Central Bank and the Federal Reserve injected cash into the financial system because of tightening credit markets.

The Dow Jones industrial average tumbled 387.18, or 2.82 percent, to close at 13,270.68, its biggest one-day decline since losing 416.02 points on Feb. 27, another day of a worldwide sell-off.

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The Standard & Poor's 500 stock index fell 44.40, or 2.96 percent, to 1,453.09 and the Nasdaq composite index fell 56.49, or 2.16 percent, to 2,556.49. The trading session was volatile, with stocks recovering much of their early losses, then declining anew.

Thursday's pullback continued an erratic pattern of triple-digit moves in the Dow since the index closed at a record 14,001.41 on July 19. Eleven of the 15 ensuing sessions have ended in a triple-digit gain or loss. Gains have been evaporating at the first mention of trouble in housing, subprime lending or the credit markets.

Asked at a news conference on Thursday morning whether he thought the tumult in the subprime lending market could put a chill on credit in the broader economy, President Bush said he did not think that the federal government needs to step in to provide more money to the financial markets. "The fundamentals of our economy are strong," he said.

"Another factor one has got to look at is the amount of liquidity in the system," he said. "In other words, is there enough liquidity to enable markets to be able to correct? And I am told there is enough liquidity in the system to enable markets to correct."

The Wall Street upheaval came after a sell-off in Europe, which was prompted after BNP, the largest publicly traded bank in France, became the latest European lender to announce problems linked to the worsening credit market in the United States, where several large companies have already announced losses. Late last month, a group of German government-backed banks agreed to bail out a bank, IKB Deutsche Industriebank, whose investments in American mortgage securities have fallen significantly in value.

With banks pulling back on lending overall, the European Central Bank lent more than $130 billion overnight at a rate of 4 percent after the overnight rates that banks charge to lend money to one another leaped. The Federal Reserve injected $24 billion into the United States banking system to keep its benchmark overnight lending rate at 5.25 percent, after it opened at 5.5 percent.

It is common for central banks to step in to stabilize the financial system when banks are either pumping too much or too little money into the markets. What was unusual about the move Thursday was the size and speed with which the banks acted.

Prices of Treasury bonds jumped as investors fled to the safety of government paper. The yield on the 10-year note, which moves in the inverse direction of its price, fell to 4.805 percent from 4.879 percent late Wednesday.

The premium that investors demand to hold junk bonds and other riskier assets, which had gone down in the last couple days, increased somewhat Thursday and trading was again light across the credit market.

"It's just indicative of a lack of confidence, of people really not (knowing) what is going on," said Kingman Penniman, president of KDP Investment Advisors, a research firm that specializes in high-yield debt. "So they react quickly to good or bad news."

During the recent boom in credit, banks and brokerage firms lent large sums to hedge funds and other investors who drove down the premium on risky assets like bonds backed by subprime mortgages that are made to people with tarnished credit histories and those taking on excessive debt.

Now as defaults on those loans are rising, banks and brokerages are demanding that fund managers come up with more collateral to back up margin loans or sell assets. Investors in these funds are also clamoring to redeem their shares in the funds.

Shares of financial companies, which investors have fled recently amid lending concerns, took another beating Thursday. Shares of Citigroup, the nation's largest bank, declined $2.59, or 5.2 percent, to $46.90 - its worst drop since September 2002. JPMorgan retreated $2.34, or 5 percent, to $44.17, its steepest decline since January 2003.

Shares of Goldman Sachs, the largest securities firm, slid $11.05, or 5.7 percent, to $182.25 on a report that the company's North American Equity Opportunities Fund is selling some holdings after it lost 15 percent of its value from the start of the year through July 27.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange. Consolidated volume totaled a heavy 5.76 billion shares, compared with 5.3 billion traded Wednesday.